I am still not sure how COVID-19 will ultimately effect start-up funding, but I do believe that we can safely assume that there will be less of it in the coming years. How exactly will this play out? I don’t know. But the question I have now is whether institutional venture capital funding will go down proportionally across the U.S., disproportionately in the traditional hot spots (New York, Boston, and San Francisco), or disproportionately in the rest of the United States. I can certainly hope and cheer for Birmingham to receive a greater percentage of what I am pretty sure will be less funding, but if I take off my rose-colored glasses, the argument is more fragile than I think any of us in Birmingham care to admit.
First and foremost, we lack the homefield advantage. There isn’t a wealth of institutional capital based in Birmingham. The model that we’ve used for our recent successes is to secure local capital in order to lure institutional capital into the market. While that worked pre-COVID-19, I’m not sure it will work post-COVID-19. Will institutional capital stay closer to home? After 9/11, VCs did not want to travel. They invested in their home cities: New York, Boston, San Francisco. And decades later, these cities remain the leaders in VC funding.
One could suggest and perhaps hope that the advent of the Zoom call will facilitate the move out of those main cities, and perhaps it will. However, that is just a hope, and hope isn’t a substitute for a plan. The capital markets will act as they want, and we are all powerless to the market. The cold hard truth of it is that we have only small amount of institutional capital in Birmingham, and if out-of-state institutional capital dries up, it’s preferable to have more based in Birmingham.
So this lack of institutional funding could further exacerbate the issues Birmingham currently has – specifically, the lack of experienced founding teams. As the tide goes out in the capital markets, my fear is the lack of quality start-ups in Birmingham will be exposed. Founders will have to prove themselves more, and if they collectively lack experience, our funding could go down.
As a consequence, we need to lean into our strengths: capital efficiency, UAB, and the fact that mid-tier cities seem to be (hopefully) positioned for a smoother recovery relative to larger cities.
Specifically, for us at First Avenue Ventures, we are:
- Continuing to focus on start-ups;
- Continuing to hold discussions, offering help and frank advice for start-ups;
- Examining new and different ways for start-ups to develop, grow, and learn; and
- Lobbying (albeit with no cohesive plan as of yet) for the New Business Preservation Act, which would match private funding for start-ups with federal dollars.